NEFT round-the-clock set to boost digital payments

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: on the difference between various payment systems like NEFT, RTGS and IMPS and their use

News: National electronic funds transfer (NEFT), a retail payment system operated by the Reserve Bank of India (RBI), became a 24x7 facility on 16 December. The facility will be available on all days of the year, including bank holidays.

How did NEFT function before 16 December?

Before 16 December, NEFT was available for customers from 8am to 7pm on all working days, except the second and fourth Saturdays of the month and other bank holidays. NEFT transactions do not happen in real time. They were settled in half-hourly batches through 23 settlements. Despite the time restrictions, NEFT handled 2.3 billion transactions valued at around Rs.228 trillion in 2018-19, up from 1.9 billion transactions valued at Rs.172 trillion in the previous year—a growth of 19.1% in terms of volume and 32.3% in terms of value. At the end of March, it was available through 144,927 branches of 209 banks.

What has changed now in the system?

RBI has now made the facility available 24 hours a day and 365 days a year. “It has been decided that NEFT shall be made available from December 16, 2019, with the first settlement taking place after 00:30 hours on December 16, 2019,” the banking regulator said. This is the second of two major changes implemented by RBI in the context of NEFT. In its July monetary policy review, the regulator decided to do away with processing charges levied by it for NEFT and real-time gross settlement (RTGS). RBI specified in November that this would come into effect for banks from January next year.

What other modes of fund transfer are available?

Two other systems of fund transfer are RTGS and immediate payment service (IMPS). Under RTGS, the minimum transfer amount is Rs.2 lakh and the facility is available only during working hours of banks. IMPS is a real-time payment service available even on holidays with an upper limit on transactions of Rs.2 lakh, but no lower limit.

What impact will this have on users?

The change is part of RBI’s push to drive digital fund movement and increase usage by offering more convenience to users. RBI’s mandate to do away with charges on retail transactions through NEFT, RTGS and IMPS was also aimed at encouraging bank customers to adopt these digital facilities. Making NEFT available round the clock will further this agenda. With no upper limit on fund transfers, combined with no transaction cost or time barrier, NEFT is likely to become the most favoured payment method.

What does this mean for digital payments?

RBI joined an elite club of nations having payment systems that enable round-the-clock fund transfer and settlement of any value, the regulator tweeted after announcing the change. The club includes Hong Kong, the UK, South Korea, Singapore and China. RBI’s digital push may reduce the use of cash and cheque for fund transfer. It will also add to the impetus driving the rise in India’s digital payments transaction value, projected to more than double to $135.2 billion in 2023, according to an Assocham-PwC India study.

RBI to steadily tighten NBFC regulations

Syllabus subtopic: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Prelims focus: the difference between NBFCs and regular banks

Mains focus: about the NBFC crisis and its implications; efforts of RBI to check further downfall in growth

News: The Reserve Bank of India (RBI) is looking to steadily tighten regulation of non-banking financial companies (NBFCs) without causing any disruption to the current recovery of the sector, RBI governor Shaktikanta Das said.

What changes are on the anvil?

• RBI has mandated that there should be a chief risk officer.
• It has also mandated that NBFCs should have a liquidity coverage ratio (LCR) requirements to take care of asset-liability (ALM) mismatches.
• There are a few other regulatory measures, which are under consideration and will be brought in steadily. These new regulations have to be brought in a non-disruptive manner.

Green shoots

• There are signs that bank credit to NBFCs is slowly reviving and the better-performing ones are able to access funds from the market at rates that prevailed before the collapse of Infrastructure Leasing and Financial Services (IL&FS).
• Overall, non-bank credit growth is, however, yet to return to pre-IL&FS levels. According to RBI data, assets of deposit and non-deposit-taking systemically important NBFCs, excluding housing finance companies, have grown from Rs. 28.3 trillion in September 2018 to Rs. 31.95 trillion in September 2019, a growth of 12.9%.
• There are some indications of investment taking place. However, it’s too early to rush to a conclusion. It is to be seen if this gets entrenched and sustained over or one or two quarters.

RBI’s efforts in regulating NBFCs

• In the October policy, the RBI governor had said that RBI was regularly monitoring the top 50 NBFCs much more closely and intensively than anyone could expect.
• He had also said the central bank was aware of vulnerabilities in the NBFC sector. Non-banks are yet to completely absorb the systemic shock following defaults by IL&FS in September 2018, and a consequent liquidity crunch.
• Besides, considering that most NBFCs have borrowed short-term money to fund long-term assets, they were able to continually refinance their borrowings as long as liquidity conditions were easy. As liquidity tightened, they were left facing debt repayment challenges and prospects of rating downgrades.
• To ensure greater credit flow from banks to NBFCs, in August 2019 RBI also increased exposure limits to a single NBFC from 15% to 20% and allowed banks to lend to NBFCs for on-lending to customers.

Challenges and way ahead

• Referring to the recent measures taken by the finance ministry, Das said the government could find it challenging to find the fiscal space to provide further boost to the ailing economy.
• He said revenue maximization, therefore, assumes greater importance in the current context.
• In the October monetary policy, Das had said that the Reserve Bank decided to go for a “temporary pause” in the interest rate-cutting cycle and wait for the government to announce further measures in the Union budget for fiscal 2020-21.
• Spike in food inflation appears to be transient. With inflation at around 4%, nominal GDP growth will come down compared to what it was 7-8 years ago. With the current nominal GDP down to 7%, it’ll be a challenge for the government to find space.
• Therefore, the government will have to focus on the accretion of additional revenue, goods and services tax streamlining and plugging loopholes, if any, disinvestment programmes and other revenue mobilization measures.

Non-GST tax revenue is subdued in the current fiscal

Syllabus subtopic:

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Prelims and Mains focus: key findings of the report; reasons for sluggish non-GST revenues and their impact on the fiscal health of the Indian economy; measures to be taken to address them

News: Even as the government struggles to shore up the GST revenue, the collection of non-GST tax revenue too seems to be subdued at a time when the economy is slowing down.

What do the findings reveal?

• Scrutiny of revenue figures of 16 major states reveals a sluggish growth in non-GST tax collection during the first seven months of the current financial year as compared to the same period last fiscal.
• The data, compiled from unaudited provisional figures of states’ monthly accounts available on the Comptroller and Auditor General of India (CAG) website, shows that combined non-GST tax collection of 16 Non-Special Category states during April-October 2019 was Rs 3,03,106.03 crore, 50.52 per cent of the budget target of Rs 5,99,987.7 crore.
• It is lower in comparison to the 52.72 per cent collected during the same period of the last fiscal against the budget targets of 2018-19.
• The states for which data have been analysed include Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, West Bengal and Telangana.
• There are 18 Non-Special Category states but the latest data is not available for Bihar and Goa.
• The data have been compared against Budget targets of current and last financial years as comparable full-year non-GST revenue figures of states are available only from 2018-19 onwards.
• The analysis shows the combined mop-up of State Excise Duties in these states was Rs 81,764.25 crore or 51.29 per cent of their total Budget target during the first seven months of the current financial year. However, it was Rs 74,809.6 crore or 55.05 per cent in the year-ago period.
• The state excise duties levied on liquor is the second biggest contributor to the state’s Own Tax revenue after sales tax. Though there is no reason given for the sluggishness in the collection of state excise duties, it can be attributed to the slowdown as well as prohibition in a few states. Besides this, collections of Stamps and Registration Fees and Land Revenue are also subdued.
• During the April-October period of 2019-20, the collection of Stamps and Registration Fees in these 16 states was Rs 68,367.97 crore — 53.40 per cent of the Budgeted target of Rs 1,28,035 crore. However, the collection of Stamps and Registration Fees was much faster — 58.33 per cent of the Budget target of Rs 1,10,668.96 crore in the first seven months of 2018-19. The collection of sales tax has also been sluggish this fiscal.

What constitutes non-GST taxes?

The non-GST taxes include mainly four taxes:

1. Stamps and Registration Fees;
2. Land Revenue;
3. Sales Tax; and
4. State Excise Duties.

Difference between Nil Rated, Exempt, Zero Rated and Non-GST supplies

Syllabus subtopic: Conservation, environmental pollution and degradation, environmental impact assessment

Prelims and Mains focus: about the findings of the study and its significance

News: More than 70% of India’s power generation comes from coal, a dependence that comes with serious health consequences, according to research.

Findings of the research on harmful impact of coal-fired power plants

• In a study, Geoffrey Barrows of the École Polytechnique and others find that the expansion of coal-based power generation can have adverse effects on infant mortality through increased pollution levels in the form of nitrogen dioxide (NO2).

• Coal power plants are responsible for around 60% of NO2 emissions in the country, according to their estimates.

• The researchers use gridded pollution data between 1996-2015 and district-level infant mortality rates to show that the expansion of coal power generation in India has increased infant mortality significantly.

• Specifically, they show that 1 gigawatt (GW) rise in coal power generation capacity increases NO2 levels by 7.6% and, consequently, infant mortality by 14%.

• In contrast, a similar increase in power capacity in the US results in only a 4.8% increase in infant mortality. The authors attribute the difference to the technology used in Indian plants, higher baseline pollution and the type of coal used in India.

• When compared to imported coal, Indian coal has higher ash content and releases more pollutants. The authors, therefore, caution against the new policy of the Indian government to place curbs on imported coal.

• They also find that cities are more vulnerable to the effects of coal-burning as these are areas with higher pollution levels and older coal-fired power plants.

• Taken together, the authors estimate that the health costs of coal power plants outweigh any local economic benefits. Much of the power produced in plants is transmitted elsewhere. They say environmental regulations need to target the use of domestic coal and older plants located in polluted areas.